Anonymous Analytics just released a hort report on Credit China FinTech Holdings – This report is an update – see an earlier report on the company here. The famous short-biased research shop thinks the stock could be the next Hanergy or Huishan Dairy. summarizes the case as follows:
Credit China is a HK$22 billion company listed on the alternative board of the Hong Kong Stock Exchange. Historically, Credit China operated as a predatory shadow banking company that provided traditional shot-term loans, including collateral-backed loans and pawn loans.1
Starting in 2013, Credit China shifted strategies and moved into the FinTech space with a series of internet-themed acquisitions aided by massive capital raises, while shedding some of its more traditional loan business.
The biggest of these acquisitions happened in April 2016, when Credit China acquired a 35% stake in a company called Shanghai Jifu for RMB560 million in cash and shares. Shanghai Jifu was described as a “leading” provider of mobile Point of Sales (“mPOS”) terminals.
However, based on our research, including a review of SAIC filings,2 we believe a Credit China subsidiary was already a major shareholder of Shanghai Jifu as early as November 2015, well before the 30 April 2016 date the Company claims that it acquired the 35% stake. Furthermore, these filings show that the documented transfer price for the 35% stake in Shanghai Jifu was only RMB2.95 million – not RMB560 million.
And finally, based on a review of relevant SAIC filings we believe that several of Shanghai Jifu’s top customers are entities with negligible business operations. We suspect the purported RMB150 million+ profit Shanghai Jifu generated in 2016 may have been materially fabricated.
In one case, it appears a company claimed to be Shanghai Jifu’s largest customer in 2014 wasn’t even established until 2015.
Given our findings, the question turns to exactly what steps Credit China’s auditor, Shinewing (HK) CPA, undertook to properly vet this major acquisition and if those steps included customer verification checks. According to our reading of the 2016 Independent Auditor’s Report, the extent of Shinewing’s vetting process seems to have been to simply rely on the word of Management for their audit of Shanghai Jifu.
Ultimately, we believe this case reflects a failing of Shinewing in its role as independent auditor and public gatekeeper.
What makes the story of Shanghai Jifu all the more interesting is that last year a listed company on the Shenzhen Stock Exchange also announced it would buy a stake in Shanghai Jifu. However, PRC regulators are still reviewing the deal which has yet to close. Given the length of the review, we suspect local regulators may have found similar irregularities with Shanghai Jifu and will not allow the deal to go through.
And….
The recent collapse of Huishan Dairy is a sobering reminder of the scourge of manipulated stocks on the Hong Kong Stock Exchange. But it’s also a reminder that all these stocks eventually collapse – like Hanergy, Tech Pro, and Hang Fat Ginseng – in spectacular fashion.
We previously presented evidence that Credit China is just another manipulated stock,12 which we also expect to ultimately collapse. Manipulating a stock is a constant fight against the gravity of fundamentals and it usually ends in disaster.
After all, isn’t it telling that a US$3 billion company with a history of tapping the capital markets is only covered by two sell-side analysts?13 And HSBC being one of those analysts hasn’t even updated their research with a standalone piece since 8 November 2016, as far as we can tell. Meanwhile, Nomura dropped coverage last month.
In any case, based on fundamentals alone, we believe Credit China should trade more in line with Yirendai, a China-based P2P company, and the closest publicly-traded comparable we could find:
Source: Yahoo Finance, Bloomberg estimates, HSBC 8 November 2016 report on Credit China
Yirendai currently trades at 7.3x 2017 estimated earnings. If we were to apply the same multiple to Credit China’s 2017 estimated earnings (HK$0.016),14 it would value the Company at HK$0.12 per share. With shares of Credit China currently trading at HK$1.03, this would suggest potential downside of 88%.
But even at HK$0.12 per share, an investor would have to assume that all of Credit China’s earnings are real. Given the evidence in this report, that is a questionable proposition.
Opinion: Strong Sell
12 http://www.anonanalytics.com/2016/12/credit-china.html pg. 30-32
13 https://markets.ft.com/data/equities/tearsheet/forecasts?s=8207:HKG
14 Based on HSBC estimates from 8 November 2016 report
Full report can be found below
